March 17, 2015

In a civil action brought by the Consumer Financial Protection Bureau involving student loans, an Indiana federal court recently granted in part and denied in part a motion to dismiss by ITT Educational Services, Inc. The court rejected ITT’s various constitutional and other arguments for dismissal of the CFPB’s claims under the Consumer Financial Protection Act (the CFPA). Significantly, however, the court dismissed the CFPB’s claim under the Truth in Lending Act (TILA), holding—in a matter of first impression in federal court—that a CFPB civil action under TILA is governed by TILA’s one-year statute of limitations. This is an important restriction on the CFPB’s ability to obtain relief for violations of TILA and the other federal consumer laws enforceable by the CFPB.

In the action, the CFPB alleged that ITT engaged in misrepresentations and other unlawful conduct to lead ITT students to obtain financing with onerous terms to pay tuition. The CFPB asserted various claims for alleged “unfair” and “abusive” conduct under the CFPA, and a claim for an alleged TILA violation. ITT moved to dismiss on three broad grounds: that the CFPA is unconstitutional, that ITT is not subject to the CFPA, and that the CFPB’s complaint failed to state a claim.

ITT’s constitutional attack on the CFPA was multifaceted. Its principal argument was that the CFPA violates the separation of powers doctrine by restricting the President’s ability to remove the CFPB’s Director only for cause. The court, however, concluded that the President’s removal power is not absolute, and that Congress therefore may place certain restrictions on the President’s ability to remove the officers of certain agencies. The court then held that nothing about the structure of the CFPA or the CFPB Director’s powers under it rendered the “for cause” restriction on removal unconstitutional.

As part of its removal power argument, ITT asserted that that no federal entity has previously combined the CFPB’s panoply of unprecedented features (e.g., the length of the Director’s tenure, authority concentrated in a single director rather than a multi-member commission, immunity from congressional appropriations process, etc.). But the court examined each feature identified by ITT and concluded that, individually, there was no constitutional problem with any of them. The court agreed that this particular combination of features in an agency may be unprecedented, but held that this alone provided no basis for finding the CFPA unconstitutional, particularly given the presumption of constitutionality with which a court must start when reviewing a statute.

ITT’s next constitutional argument was that the CFPA’s prohibitions against “unfair” and “abusive” conduct are unconstitutionally vague in violation of the due process clause because such terms fail to give educational institutions fair notice of what is required of them. The court rejected these arguments, reasoning that that the term “unfair” has been made concrete in the Federal Trade Commission Act for more than a century. Likewise, the court held that the term “abusive” has been used by Congress in the past in statutes such as the Fair Debt Collection Practices Act and, moreover, is actually given a more precise definition in the CFPA.

The court then turned to ITT’s various arguments that it was beyond the CFPA’s jurisdiction, including the argument that it did not actually provide the financing that was at the heart of the CFPB’s complaint. The court held that the CFPB’s complaint nevertheless sufficiently alleged that ITT engaged in “financial advisory services,” which is covered under the CFPA, in that ITT advised students how to manage their debt, often channeling them into the complained-of financing. The court further held that the complaint adequately pled that ITT qualified as a “service provider” under the CFPA because the complaint alleged ITT was heavily involved in operating and maintaining the loan program at issue.

Finally, the court considered the adequacy of the CFPB’s claims themselves. The court conducted a detailed review of the allegations supporting each of the CFPB’s three claims under the CFPA, and held that the elements of each were adequately pled.

The court then addressed the CFPB’s TILA claim, and held that it was barred by TILA’s one-year limitations period under 15 U.S.C. Section 1640(e). The CFPB urged that 15 U.S.C. Section 1607, and not Section 1640, governed its TILA claim, and that the claim was not subject to Section 1640’s one-year limitations period. Rejecting the CFPB’s argument, the court explained that Section 1640 is not limited to private civil actions, so it applies on its face to actions in which a government agency like the CFPB is the plaintiff. In addition, the court explained that Section 1607 applies only to the CFPB’s administrative enforcement actions, and not to its civil actions.

This case was previously discussed in a Ballard Spahr webinar on May 20, 2014. The webinar materials can be accessed here.

If you have questions, please contact CFS Practice Leader Alan S. Kaplinsky at 215.864.8544 or kaplinsky@ballardspahr.com, Christopher J. Willis at 678.420.9436 or willisc@ballardspahr.com, or Joel E. Tasca at 215.864.8188 or tasca@ballardspahr.com.

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